Published 10:00 pm, Wednesday, May 25, 2005

The Department of Revenue said yesterday that it will begin to aggressively pursue art collectors who do not pay the taxes they owe on works purchased out of state. The agency said it will first launch an educational campaign to make sure collectors know they owe the tax, then vigorously enforce a law that has been largely ignored by the art world since it went on the books in 1935.

The DOR also decided yesterday that collectors must pay taxes on their out-of-state purchases even if they are on display in museums.

The Seattle Post-Intelligencer reported last week that the agency had squelched an agent's attempt to begin collecting the "use tax" on out-of-state art purchases, and specifically forbade agents to pursue the tax on art being displayed in museums.

The changes in the agency's policy could dramatically increase collections of an estimated $25 million a year in art-use tax owed by Washington art buyers. The DOR says it does not know how much it is now collecting.

The department had previously told revenue agents not to walk through museums taking down names of art owners who might owe tax on their purchases because "the agency felt that was not an appropriate method ... because it was being discussed and debated whether having art on public display was taxable or not," said DOR Deputy Director Ralph Osgood.

The decision to order agents not to investigate art on display was made by Osgood -- also the mayor of Tumwater -- with former DOR Director Will Rice and another manager who's no longer at the agency, Osgood said.

"It has now been determined that we believe it is a taxable activity," he said yesterday. "The final decision was made this morning."

The P-I reported last week that millions of dollars in purchases by Washington art collectors have gone untaxed, and that an effort to collect that revenue was impeded by upper management and then suspended late last year.

The P-I investigation showed that as revenue agents tried to pursue leads and collect unpaid use tax from wealthy art collectors, managers repeatedly put the brakes on enforcement efforts, potentially costing the state millions of dollars in revenue.

When agents tried to walk through museums to find out who owned the art on display -- information that would allow them to investigate whether the art owners had paid their taxes -- they received an order from above to stop investigating such art on display.

Last May, Department of Revenue supervisor Jennine Purrington warned manager Brian Moran in an e-mail to tell his agents to be careful of "high profile or sensitive issues" (SAM donors being the latest example.)

Moran told agents working for him not to pursue art collectors who have artwork on public display. "There are some significant policy questions in Exec's mind about taxing personal art on public display," Moran wrote to his staff.

"Until further notice, do not take any action on cases where you 'discover' taxability based on public display (example: Seattle Art Museum), or any other museum-type of environment."

There is no state law that says privately owned art on display should not be taxed, Osgood said.

In fact, an attorney representing Microsoft co-founder Bill Gates worked closely with former DOR director Len McComb in 1995 to craft a bill that would make art displayed for the public exempt from taxes, but that proposed bill was dropped after wealthy art collectors objected that it would bring undue attention to a tax the state was not collecting -- and most collectors were not paying.

"They weren't paying it and didn't want us to bring up the subject," said Richard Ford, Gates' attorney at his father's firm of Preston Gates & Ellis. "I dropped it. Let sleeping dogs lie, they said. Why create a problem where there is none?"

Osgood said that when the department started approaching art owners about unpaid use tax on art, many owners and their attorneys questioned whether art on display or in storage was taxable.

He said art owners pressured the department to drop the investigation, saying that these works of art were not subject to tax.

Osgood said this pressure was not the reason the department decided in December to shut down the investigation.

He said that collectors who have homes in other states where they are not subject to use tax might decide to leave the art there. "That means we'll see less art in this state, and I don't think that's a good outcome," Andrews said.

Osgood said leads uncovered in the art use-tax investigation last year are still being pursued, but agents are no longer using a treasure trove of art-purchase and -shipping receipts discovered by an agent last year to uncover more cases of possible art use-tax non-payment.

Instead, the department has decided to launch an informational campaign to let art owners, buyers and accountants know that Washington residents who buy art out of state and bring it into the state must pay use tax unless they paid sales tax when they originally bought the work. The tax varies by county and is 8.8 percent in King County.

If the department can prove that a taxpayer purposefully evaded the tax, it can collect taxes, penalties and interest on purchases made in the last seven years.

Experts estimate that Washington collectors spend about $300 million on art every year, and say most people do not pay use or sales tax on their purchases. The state stands to collect an estimated $100 million in use tax owed on purchases over the past four years, and $25 million a year in the future.

The DOR will likely create an amnesty program for art owners who voluntarily report their purchases, Osgood said. The program may forgive penalties or interest owed on unreported purchases, he said.

People who do not self-report purchases but are then caught by tax investigators will likely be required to pay taxes, penalties and interest, which can bring the total owed to two or three times the original tax owed.

"At the end of this voluntary compliance program, we will then aggressively start our enforcement program," he said, adding that the department "will be fair and consistent in our application of tax laws. ... If there's tax owed, it's our goal to collect it."

The department's art-use tax education program will start sometime this summer, and enforcement efforts -- to track down people who didn't report taxes owed -- will likely start in the fall, Osgood said.

The agent who launched last year's art use-tax investigation, Linda Fryant, remains on paid "home assignment," and her former supervisor, Moran, is still working for the DOR in Florida. Sources say Moran's transfer was forced; the agency has said it was voluntary.

Osgood said he was unable to comment on Fryant's status because personnel matters are confidential.